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Friday, July 31, 2015

The History of Insurance

Insurance as a concept has been around as long as humankind in some form or fashion. Insurance at its core is about the distribution and management of risk, and as thinking animals, man has been doing so for thousands of years. Whether it was hunting in a group to minimise risk of injury or splitting vital goods among different carriers on a dangerous trail through the wild, both things are at their essence about the distribution of risk. They are 'insurance'.

As a more formal enterprise involving money, insurance has been with us since the ancient world. The 1750 BC Babylonian Code of Hammurabi included reference to a debtor not having to repay a loan if some horrendous unforeseen event should befall them. These events included natural disasters, disability or death. Early Mediterranean naval merchants received loans to fund their shipments. When they did so, the merchants paid the lender an additional fee in exchange for a guarantee from the lender to cancel the loan if some woe should befall their shipment at sea.

The ancient enscription of the 'Code of Hammurabi'.

In medieval Europe, insurance was carried out in the guilds. The guilds with more money behind them set aside coffers of gold and currency that were used as an insurance fund. If a guild member's house burned down or they were robbed, the guild would compensate them using money from this fund. If a master was disabled or killed, this fund would go to support their widow and any family they may have left behind. In this way, the guilds offered forms of home insurance and life insurance.

The first known insurance contract was from Genoa in 1347 AD, and from there maritime insurance developed widely, including contracts that had scaled costs based on the differing risks of certain routes and voyages. Moving into the enlightenment and Early Modern Europe, the process of underwriting first came to be. Wealthy investors and those who wished to invest would take on responsibility for certain ship's cargo in voyages to the new world. If that cargo were lost or destroyed, refunding would be their financial responsibility. In exchange, these investors (the first underwriters) would be promised a share of the riches, crops or precious metals the voyages discovered in the Americas (which were believed to be teeming with them). The main appeal for these underwriters was the acquisition of new world tobacco.

Tobacco was just as addictive in the Early Modern Era, as it motivated the first underwriters to 'insure' voyages to the Americas.

Formalised property insurance came into being in the aftermath of The Great Fire of London in 1666. The unprecedented devastation of the fire was estimated to have claimed the properties of up to 70,000 of the city's 80,000 population. Groups of the underwriters mentioned previously, who had up until this point only dealt in maritime insurance, began to see the need for fire insurance, so they formed companies and offered to the general public at a price (the 'premium'). The development of insurance was also contributed to by the development of mathematics. The Frenchman Blaise Pascal discovered a numerical way to express probabilities, and this was applied to risk of certain events. In the wake of this discovery, it became possible to assess and give costs to various categories of risk based on their prevalence or probability of occurring. This is why today, when you go to purchase life or health insurance, your premiums will be higher if you are older or in more infirm health (you present a higher probability or 'risk' of a claim).

Whilst the insurance business began to thrive in Europe, overseas it was a different matter. In America especially, colonial life was deemed to be far too fraught with risk for any prospective insurer to even touch, lest they find themselves rapidly bankrupt. As a result, it took almost a century for insurance to become widespread in America after its initial colonisation. When it finally did however, more recent developments from Europe were incorporated into its design. At this time, all the hallmarks of modern insurance were in place and whilst insurance continues to change and develop to this day with the technology and the times, the core bedrock remains the same.

It's safe to say that insurance will always be part of society in one way or another. The process of distributing and managing risk seems to be engrained into our social being and our rational minds, as does the desire for profit and protection which informs both sides of the insurer/policy holder relationship.